Concern is growing in U.S. financial markets that the Federal Reserve will raise interest rates later this month, but it was not last week’s economic reports that changed investors’ outlook.
Rather it was the remarks Friday of Boston Fed president Eric Rosengren — a dove on rates who appeared to be changing his position — that gave the markets pause. All three major indexes — the Dow Jones industrial average, the S&P 500 index and the Nasdaq composite index — fell more than 2 percent for the day after Rosengren said improvements in the job market are leading to pay gains for workers, a development that could spur inflation.
“A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery,” Rosengren told the South Shore Chamber of Commerce in Quincy, Mass.
Meanwhile, Federal Reserve governor Daniel Tarullo told CNBC after Rosengren spoke that he wants to see more evidence of inflation before he considers a rate hike.
“We’re not running a hot economy,” he said, adding that he believes the economy still has room to create jobs.
Rosengren and Tarullo are voting members of the Federal Open Market Committee, the Fed’s rate-setting panel. It will meet Sept. 20-21 in Washington, D.C. The Washington Post said Rosengren’s remarks appeared to surprise investors.
On Monday Reuters reported that Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said there should be a “serious discussion” about whether to increase rates at next week’s Fed meeting.
"If 1.6 percent inflation and 4.9 percent unemployment were all you knew about the economy, would you consider a policy setting one tick above the zero lower bound still appropriate?" Lockhart told the National Association of Business Economists. "I think circumstances call for a lively discussion next week."
He later told reporters that there is no "urgency" for the Fed to act at any particular meeting.
Lastly, Reuters said Fed governor Lael Brainard appeared to be holding firm in urging caution in a speech Monday afternoon to the Chicago Council on Global Affairs.
"Today's new normal counsels prudence in the removal of policy accommodation," Brainard said in her prepared remarks.
She said the labor market could tighten further without causing inflation pressure to increase.
"The response of inflation to unexpected strength in demand will likely be modest and gradual, requiring a correspondingly moderate policy response," she said.
Brainard had the last word, for now. Fed officials won’t be able to give any more speeches until after their rate-setting committee meets next week.
The mildly disappointing August jobs report had convinced the markets that the Fed would not raise interest rates this month and probably would wait until at least December.
Separately but, like the jobs report, pointing toward the wisdom of a further delay on rate moves, at midweek the Fed’s latest beige book report on current conditions was only modestly positive and did not suggest that the economy will surge in the second half of the year.
The Fed report said manufacturing activity “was flat to slightly up.” Six Fed districts reported tight labor markets; overall, “wage pressures remained fairly modest.”
“In sum, the beige book does not show any evidence that the Fed is going to have to act quickly to raise interest rates, but it is consistent with the continuation of a slow and gradual policy normalization process,” Tom Simons, economist at Jefferies, told MarketWatch.
Although job growth continues, the Wall Street Journal said a new Labor Department report showed that job openings in the United States rose to a record 5.9 million in July, even though hiring was unchanged from June, at 5.2 million. That suggests businesses are having trouble filling certain positions.
Anecdotes from the beige book echoed the finding.
“In many districts, businesses reported trouble filling job vacancies for high-skilled positions,” the beige book said, including technology jobs, engineering and construction work. Wage pressures accelerated for highly skilled workers and were “fairly modest” for most workers, the beige book said, and price inflation was “modest.”
Later this week the Fed’s decision-makers will see important reports for August on retail sales, inflation and consumer sentiment.
Economists’ median forecast is that retail sales, excluding motor-vehicle sales, rose 0.2 percent during the month, but when those sales are figured in, sales will be found to have slipped 0.1 percent. The report is due Thursday from the Commerce Department.
On Friday the Labor Department will release the Consumer Price Index, and it is expected to show a modest increase of 0.1 percent. Core CPI, which filters out volatile energy and food prices, is expected to have risen 0.2 percent.
Such modest increases, if they occur, would complicate the Fed’s decision.
Separately, the University of Michigan’s Consumer Sentiment Index, which turned downward to 89.8 in its most recent reading at the end of August, is expected to rebound to 91.0.
One additional thing the new beige book found is that companies are cautious about expanding because of the presidential election campaign, which is particularly acrimonious this year. Given the widely different positions of Democratic candidate Hillary Clinton and Republican Donald Trump, that’s not surprising.
Just as employers sit and wait, it would not be surprising if the Fed does, too.